A Second Chance for Dan Hesse and Sprint
Back in 1977, Dan Hesse didn’t want to work for Sprint; he wanted a job at AT&T. But AT&T only recruited from Harvard and Wharton. So Hesse, at the time at Cornell, called his sister who lived in Boston, and asked a favor: Go to Harvard and write down all of AT&T’s job posts from the bulletin board. She also grabbed him a copy of the application.
“I sent it to the recruiter at AT&T,” Hesse said. “And he goes, ‘This kid’s at Cornell. What the heck?’ But he was curious and he picked up the phone and asked me about it and said ‘I want to meet you.'” Then Hesse booked a plane ticket the very next day, which would turn into 23 years at AT&T.
From Sprint’s commercials, you get a sense that Hesse is a plain-spoken, low-key sort of man. But underneath the nice-guy exterior is a tough-as-nails character hardened by decades of battles in the chaotic and fast-changing telecom world. When AT&T announced its merger plans with T-Mobile, Hesse displayed that side, leading Sprint’s charge on Washington to kill the proposal, which in no small part, ended with AT&T conceding defeat and paying T-Mobile $5 billion in cash and spectrum for doing absolutely nothing.
But since 1997, when Hesse took over the helm at Sprint, he’s been unable to turn around the company’s downward spiral — from the Nextel debacle to its contentious relationship with Clearwire. Now, by teaming up with SoftBank, and armed with the cash necessary to execute on a data strategy, he’s looking to fight Sprint’s way back into relevancy.
The Nextel Thorn
A little background is needed in order to understand Sprint’s current situation, and hence, its future strategy. And more or less that starts with Nextel. Hesse didn’t create the problem. But he had to clean it up.
In 2005, then-CEO, Gary Forsee, saw Nextel as way to tackle its growing problem with churn — the rate existing customers leave for rival carriers. At the time, Sprint was hemorrhaging subscribers, due in large part to its poor customer service, and AT&T and Verizon were gorging on Sprint’s misery, adding millions of new subscribers each quarter.
Forsee structured the Nextel deal as a merger-of-equals, and as a result, the company had two headquarters — one in Reston, Va. and another in Overland Park, Kan. — leading to a 50/50 split in management teams, board of directors and even business cultures. They even took the Sprint brand and used the Nextel colors.
All this led to fragmentation and a brand identity crisis, and before a strategy of attack could be mounted on AT&T and Verizon, the organization needed swift housecleaning to stem in-house troubles and prevent any further damage. As a result, Forsee was asked to step down, and Hesse was brought in to right the ship.
“In 20/20 hindsight, the Nextel merger was a bad idea,” Hesse said. “This is kind of what you learn this in business school — a merger of equals isn’t a good thing.”
Within weeks, he let go of three top executives, including one who had acted CEO. In addition, he put out a plan to slash over 4,000 jobs and close down under-performing stores to streamline distribution.
Financial services firm Bloomberg would later rank Sprint’s buyout of Nextel as one of the worst mergers of the last five years.
It’s a Customer Service Issue
By 2006, Sprint had serious problems: a mass exodus of subscribers was leading to skyrocketing churn rates. But merely cutting prices or offering new devices wouldn’t fix the underlying issue. To attract customers, the company would have to fix its customer service.
“We were last in customer satisfaction,” Hesse said. “Last in 2007, 2008 and 2009.”
To hold onto what existing customers they had, Hesse quickly took charge and harnessed the data on customer “pain points” — reasons why customers were calling — and organized their management around those problems: for example, if customers were calling because calls were dropping, if they didn’t understand the bill or a poor retail experience.
“I took those numbers every week to the head of network or head of marketing, or head of billing — and I said ‘Own that number to get it down,'” he said. “In 2010, we moved out of the cellar. We’re now in the No. 1 spot.”
Palm’s Misfortune Is Sprint’s Misfortune
In the meantime, Apple had released the first iPhone in 2007. AT&T paid a premium to be the exclusive U.S. carrier, and consumers began leaving Sprint in droves for the iconic device. As a countermeasure, Sprint, which had a long-standing relationship with Palm, signed up to be the exclusive carrier for the Pre, the first device to run on the highly-touted WebOS operating system. And the company threw what remaining resources it had into backing it.
“If you look at any Sprint ad, if there’s a phone in it, it’s the Palm Pre,” Hesse said.
Of course, the Pre was met with lukewarm demand, and Palm released a few more lackluster devices before running out of funds and accepting a $1.2 billion buyout from Hewlett-Packard in 2010. For Sprint, the blow to Palm was equally devastating. In addition to lost resources in marketing, years were wasted backing an ultimately failed device.
During that time, for example, Verizon built its now-popular “Droid” brand. Leveraging the popularity of Android, Verizon now has a franchise brand, similar to Samsung’s Galaxy line, giving it a competitive edge in differentiating its Android products from the rest, but also as a means to lure customers to its service.
AT&T used those next years of iPhone exclusivity to solidify its customer base. All that means revenue — revenue that was built up from adding more customers, revenue that was saved in their war chest, revenue that would be needed for the data wars.
“You’ve got to almost put the iPhone, to be fair, in a separate category,” Hesse added. “The Apple brand, and that device, has done so well — it’s like comparing someone to Michael Jordan.”
Which Came First? The Phone or the Plan?
In the telecom business, each time a carrier upgrades its network — from 2G to 3G, or 3G to 4G, for instance — it can cram five times the capacity over the same airwaves. That means they also pay one-fifth the cost. The advantages of upgrading are significant not only to stay competitive, but to keep costs down.
But, of course, those advantages require a carrier to have the billions of dollars required to build out and upgrade a network, which is something Sprint didn’t have, until SoftBank came knocking.
There’s another magic number — and it’s $200 for the price of a phone. For example, AT&T, Verizon and Sprint pay around $600 for an iPhone, which they sell for $200 with a two-year plan. Customers save $400, but carriers have to make up the difference with a contract of 24 easy payments.
Carriers need to lock customers in to recoup their cost — a business model that was spurred by adaptation. If the iPhone cost $600, not everyone would have one. But below $200, with those easy payments, and everyone carries one. But making up the $400 difference requires the offer high-speed data on the back-end, and ability to sign up subscribers, rather than prepaid customers, largely tied customer service and competitive pricing.
The Failed 4G Push
Today, there’s one cell phone for every two people in the planet, or around 3.5 billion phones in existence, making telecom a big business. It’s one-of-five trillion dollar industries in the world — along with tourism, military, food and automobiles. There are 10 times more cell phones produced each day than babies are born in the world — and the trajectory is moving upward.
“I think the key for Sprint is that old Gretzky quote, ‘You’re not that fast, how come you’re always at the puck? I skate to where the puck is going.'” Hesse said. “And the puck is going really to data. I use the broad definition of data, which is 4G. We worked really hard on the network on data. We skated to be the first in 4G and data.”
Recognizing in 2007 that the future would lie in data, Sprint teamed up with Clearwire to become the first carrier to launch 4G. But poor execution led to a souring relationship centering on disputes over cost and pricing Sprint would have to pay to rent Clearwire’s WiMax service. In addition, Clearwire began to push into retail, rather than use its limited funds on building out its 4G footprint.
In the end, Sprint’s partnership proved more troublesome than it was worth. Sprint had the foresight, but failed in executing it. Either way, the company wasted valuable time it didn’t have. Rather than build on its first-adopter status in 4G, it stumbled, giving AT&T and Verizon to catch up. Rather than continue with Clearwire, Sprint instead decided to go about its 4G network alone, but it fell behind.
Building out such a service requires billions in cash, cash that it didn’t have because of a high churn rate through years of struggle. With limited funds and a shrinking customer base, Sprint was in a Catch-22: it needed revenue to build a network to draw customers, which in turn, would generate more revenue from data to continue to expand its network.
The Evolution of Data
Whether Sprint succeeds or fails, the data revolution will continue. The telecom industry isn’t just about the phone or data anymore — it will provide the wireless infrastructure necessary to support a new generation of Web-connected devices.
Refrigerators will tell you when you need groceries, and self-driving cars will pull turn-by-turn directions from the Internet and drive to the store and pick them up. Meanwhile, wireless pills will measure what chemicals are in your stomach, while clothes you wear will measure your heartbeat and relay it to healthcare providers keeping tabs on your high cholesterol. In short, everything is going to be connected, wirelessly — and all these products will have to pay for data.
“This is within the next five years,” Hesse said. “It really is an exciting time not only in telecom but in digital technology.”
Sprint’s Comeback Blueprint
So where does Sprint fit in? Hesse understands that the future for telecom lies beyond phones, but in building out a nationwide wireless broadband network to support the anticipated boom of wireless products. Once these arrive, the gap between carriers that have, and carriers that have not, will be even more pronounced. Sprint and T-Mobile, who fell behind in the data wars, will be forced out, unless they expand their high-speed footprint.
Enter that Catch-22. How do you build out a billion dollar network without cash flow from customers to fund it? This is a key point where Sprint and T-Mobile diverge in their strategies.
Whereas Sprint elected to sell a controlling stake to SoftBank, T-Mobile decided to merge with MetroPCS. T-Mobile and MetroPCS will operate separately until 2015, when MetroPCS will shut down its network. SoftBank, meanwhile, will own 70 percent share of Sprint, paying a price just north of $20 billion, and have full control of the future. Hesse will continue to be CEO, for now.
For SoftBank, a holdings company with its own interests in Internet and telecom, Sprint gives it an opportunity to venture out from the stagnant Japanese market into the burgeoning North American sector. For Sprint, the cash infusion gives it the necessary funds to execute on its high-speed data plans.
Sprint, in the course of eight years, dug itself into a series of deep holes. And in essence, those holes cost it $20 billion in the form of the SoftBank rescue. But realistically, the price is much higher, due to lost time and opportunity. Aligning itself with SoftBank, however, may buy it some leeway, and the Japanese company itself can offer a few lessons in reinvention and rising from the ashes.
The White Samurai
Masayoshi Son is Japan’s second-richest man with an estimated fortune of $7 billion, despite being famous for losing the most money in history — around $70 billion — in the wake of the dotcom crash.
In 1981, Son founded SoftBank as a software distributor. After dabbling in trade shows by acquiring and running COMDEX, he soon established partnerships with U.S. tech companies looking to enter the Japanese market.
With the emergence of the Internet, in 2006, Son teamed up with Yahoo to spearhead one of Asia’s first Internet ventures, leading to a highly-successful Yahoo Japan portal. But after the disastrous Internet bubble burst in 2000 wiped out 98 percent of its market value, Son resurrected the company to move into telecoms. By acquiring Vodafone Japan, and developing a close personal friendship with the late Steve Jobs, which led to an exclusive license to sell the iPhone in the country, SoftBank surged to become one of Japan’s top three carriers in just a matter of years.
Son has a 300-year plan for SoftBank. He believes, one day, people will communicate without speaking, via telepathy, and live to the age of 200. While he’s not there yet, as the stagnant Japanese market saturates, Son, not one to shy away from risk, is setting his sights on continued growth in North America through a stake in Sprint.
Unlimited Data for All
In contrast to SoftBank’s meteoric second rise, Sprint was not so fortunate. In the rush to capitalize on data, AT&T and Verizon capped their unlimited data plans, and introduced a more lucrative tiered structure. Consumers complained, but they ultimately relented. Meanwhile, Sprint resisted industry trends and kept their unlimited plans, largely missing out on increased revenue at a chance to keep and lure subscribers.
“Digital One Rate, which we launched back at AT&T, was all about simplicity. It used to be, if you were making a local call in my hometown, it was A cents a minute; local call while traveling, B cents a minute. You had all these different rates,” Hesse said. “That’s why Digital One Rate took off. People were paying more — it wasn’t a price cut. It’s all about simplicity. And customers will pay a premium for simplicity.”
Of course, the sacrifice for simplicity didn’t draw new customers as planned. But if it’s any indication, Sprint will continue to offer the simpler all-you-can-eat plan as part of a larger strategy.
“It also drives down the calls to our customer care,” he added. “We’re removing the reasons for customers to call, and one of the big ones is, ‘Hey what’s this extra charge?'”
The Long Road Ahead
SoftBank has since diversified into financial services, media and marketing, among others, in addition to its Internet and telecom businesses, so Sprint will get the funds it so desperately needs to expand. The question won’t be whether it rolls out a high-speed network, or when — it’ll race as fast as it can — but whether it can compete with AT&T and Verizon once it does.
Sprint will still be years behind them. And other critical factors — like franchise branding — will play an important part of whether it can turn things around. Carriers now offer the same homogenized devices — iPhone or Android — so in order to lure subscribers, it will need to be laser-focused with an aggressive pricing strategy, offer top-notch customer service and deliver a brand with a clear identity — those previous underlying problems.
Hesse spent the last five years fixing those moving parts, and Sprint will need them all to work in tandem, along with a leading high-speed network, to see success in the highly-competitive telecom industry. Then, hopefully, when the digital boom hits, Hesse’s vision will take hold.
The emergence of the cell phone has crippled several industries along the way — payphones, calling cards, watches and cameras. More cell phones have been built with cameras than all standalone digital and film cameras ever made… combined.
Smartphones have become Swiss Army knives. They’re your watch, your calendar, your e-mail, your GPS, your computer — but you also have to make compromises on each of those to be able to have them all on one device. Hesse believes, in the future, we’re going to begin to see components diverge and complement ever-more-powerful smartphones.
“Say I’d like to take a digital SLR camera with me, and take photos at 15-megapixels, but I’ve been taking the camera phone because I want to upload that picture right now,” he said. “With 4G, all of these other devices, like SLR cameras and high-definition camcorders, will be connected.”
In terms of mobile speed, with 1G, the U.S. was No. 1; With 2G, the advantage moved to Europe with GSM; In 3G, that advantage moved to Asia with Japan and Korea; But now, with 4G, the U.S. is back in the driver’s seat.
Cell phones were invented in the U.S., and now, they’re going to revolutionize everything else. And if Hesse has his way, Sprint is going to be in the race — if he can avoid the pitfalls of the past.
